L2. Code of ethics and standards of professional conduct Flashcards
- Describe the structure of the CFA institute Professional Conduct Program and the process of enforcement of the Code and standards - State the 6 components of the Code of Ethics and the 7 standards of professional Conduct - Explain the ethical responsibilities required by the code of standards, including the sub-sections of each standards
The handbook seeks to
Educate members and candidates on how to apply the Code and Standards to their professional lives and thereby benefit their clients, employers and the investing public in general
Difference between ethical behaviour and legal conduct
Legal behaviour is described as what is required and ethical behaviour as conduct that is morally correct
Code of ethics (6)
- Act with integrity, competence, diligence, and respect and in all ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.
- Place the integrity of the investment profession and the interests of clients above their own personal interests.
- Use reasonable care and exercise independent professional judgement when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.
- Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.
- Promote the integrity and viability of the global capital markets for the ultimate benefit of the society.
- Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.
Standards of Professional Conduct (7) - Professionalism
- Knowledge of the law; understand and comply. Must not knowingly participate or assist in and must dissociate from any violation of such laws, rules or regulations
- Independence and objectivity; must use reasonable care and judgement to achieve and maintain independence and objectivity in their professional activities. Must know offer, solicit or accept any gift, benefit, compensation that compromise own or another’s independence and objectivity
- Misrepresentation
- Misconduct
Standards of Professional Conduct (7) - Integrity of capital markets
- Material nonpublic information
2. Market manipulation
Standards of Professional Conduct (7) - Duties to clients
- Loyalty, prudence and care
- Fair dealing
- Suitability; make reasonable inquiry into a client’s or prospective client’s investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking investment action and must reassess and update regularly - determine investment that is suitable
- Performance Presentation; make reasonable efforts to endure that is fair, accurate and complete
- Preservation of confidentiality; keep information about current, former and prospective clients confidential
Standards of Professional Conduct (7) - Duties to employees
- Loyalty
- Additional compensation agreements; must not accept gift, benefits or compensation that competes or expected to create conflict of interest unless agreed
- Responsibilities of supervisors
Standards of Professional Conduct (7) - Investment analysis, recommendations and actions
- Diligence and reasonable basis; exercise diligence, independence and thoroughness in analysing investments, making recommendations and taking investment actions
- Communication with clients; must disclose basic format and process used to analyse investments and disclose changes that might materially affect those processes, Use reasonable judgement in identifying factors which affects analyses, Distinguish between facts and opinions in presentation of analysis and recommendations
- Record retention
Standards of Professional Conduct (7) - Conflicts of interest
- Disclosure of conflicts
- Priority of transactions
- Referral fees
Standards of Professional Conduct (7) - Responsibilities as a CFA institute member or candidate
- Conduct as participants in CFA institute programs
2. Reference to CFA institute, CFA designation and CFA program
Practice Problems
Pg 66 - 70
Structure of the Professional Conduct Program
- Board of governors - maintain oversight and responsibility for the professional conduct program
- In conjunction with the Disciplinary Review Committee who is responsible for enforcement of the code and standards; a volunteer committee of CFA charterholders who serve on panels to review conduct and partner with Professional conduct staff to establish and review professional conduct policies
- CFA institute bylaws and rules of procedure for professional conduct (rules of procedure) for the basic structure for enforcing the code of standards. Also responsible for enforcing testing policies of other CFA institute education programs as well as professional conduct of certification in investment performance measurement (CIPM) certificants
Professional conduct inquiries comes from a number of sources
- Members and candidates must self disclose on annual professional conduct statement all matters that question their professional conduct, like involvement in civil litigation or criminal investigation or being the subject of a written complaint
- Written complaints received by Professional Conduct staff can bring about an investigation
- CFA staff may become aware of questionable conduct by a member or candidate through the media, regulatory notices or another public source
- Candidate conduct is monitored by proctors who complete reports on candidates suspected to have violated testing rules on exam day
- CFA may also conduct analyses of scores and exam materials after the exam and monitor online and social media to detect disclosure of confidential exam information
When an inquiry is initiated
Professional conduct staff conducts an investigation that may include requesting a written explanation from the individual, interviewing the member, complaining parties and third parties, and also collect documents and records relevant to the investigation
May conclude with no disciplinary action, issue cautionary letter or continue proceedings to discipline the individual
When staff believes a violation occured
Individual can reject or accept the charges
Reject and propose matter to be referred to DRC members
